Investing in mid-cap stocks that pay dividends definitely has its benefits. In a recessionary environment, stocks with a stable history of dividend payouts and earnings growth offer investors something stable to base their portfolio around. Mid-cap stocks with a consistent history of dividends typically give the investor better downside protection relative to pure growth stocks and can provide some peace of mind when the going gets rough.

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Looking to the past, sectors such as utilities, health care services and large conglomerates such as Proctor & Gamble (NYSE:PG) were regarded as the ideal additions to a good income focused portfolio. However, with the current interest rate environment at extreme lows, even these large-cap equities can fail to provide a satisfactory dividend yield for investors. To find better yields in equities, one of the obvious alternatives is to look one step down in market cap sizes to the mid-caps (around $2 billion to $10 billion in market cap size).

But as the saying goes in business, there is no such thing as a free lunch, and this saying definitely extends into our search for higher yields. High yielding stocks will generally come with increased risk, typically in the form of greater volatility in stock prices. However, we can try to mitigate this risk by looking for stocks with a solid history of dividend payments and growth, with solid balance sheets.

With that said, here are some stock ideas we think you may be interested in pursuing if you are looking for higher yields:

Company Ticker Yield
Mercury General Corp. MCY 5.67%
AGL Resources AGL 4.94%
Garmin Ltd. GRMN 4.78%
ConAgra Foods Inc. CAG 4.10%
NYSE Euronext Inc. NYX 4.03%
data as of 12/21/2010

AGL Resources

One of the more interesting stocks on this list, in terms of growth potential, is AGL Resources. At the start of the decade, AGL was paying a dividend of $1.08 on earnings per share of $1.29, which was a payout ratio of about 84% of its earnings. Fast forward to 2010, and the company has grew its earnings per share to $3.10 for the last 12 months, yet is only paying a dividend of $1.75, or a payout ratio of only 56%. Given this fact and their healthy cash flows, there is definitely room for the company to increase its dividend payout, which is one of the reasons why this stock could deserve some consideration from income investors.

Bottom Line

Mid-Cap stocks may be a bit more risky then their counterparts in the large-cap equity sector, but can also offer more worthwhile yields. With challenging economic conditions and a low interest rate environment, doing a little legwork can uncover income winners in these alternative sectors. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years.)

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